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1-12-2020

james-latham

Change of carriage of a bankruptcy petition has always been a tricky area, as Hood v JD Classics Ltd (In Administration) [2020] EWHC 3232 (Ch) demonstrates, which may be a reason why it is rarely used. In this case Michael Green J allowed an appeal from a decision of Deputy ICC Judge Jones granting change of carriage of a bankruptcy petition brought by HMRC against the appellant, Mr Hood, to the respondent, JD Classics Limited and making a bankruptcy order against him.

In May 2019, HMRC presented a bankruptcy petition against Mr Hood. In June the respondent gave notice of intention to appear on the petition as a supporting creditor. At the first hearing of the petition the judge adjourned it to allow Mr Hood to make an application for an order validating payment of the petition debt, but this was dismissed on the basis that he was insolvent, even ignoring the petition debt (Hood v HMRC [2019] EWHC 2236 (Ch)).

Mr Hood arranged for the petition debt to be paid by two third parties: his ex-wife, who paid HMRC directly, using her solicitor’s client account, and a business associate, Mr Hill, who paid HMRC from his bank account as a loan to Mr Hood. HMRC had said that on receipt of the £1 million debt they would instruct their solicitors to request that the petition be dismissed.

The respondent, however, applied under rule 10.29 Insolvency (England and Wales) Rules for change of carriage of the petition. Following trial, the judge found that Mrs Hood’s payment was a gift to her ex-husband, so a third party payment not liable to be avoided by s. 284 Insolvency Act 1986, but that the payment by Mr Hill was from his own funds so that Mr Hood had no interest in the funds; and that as it was made unconditionally, in the sense that it was not conditional on the petition being dismissed, it was simply a transfer of funds by him and not subject to any trust. It was, however, the judge found, to be treated as a loan by him to Mr Hood “to be repaid or reimbursed.” As a loan it was caught by s. 284, there was therefore jurisdiction under rule 10.29(3) to make a change of carriage order. Furthermore, as Mr Hill's payment was void under s.284, the petition debt was not discharged and there was no bar under s. 271(1)(a) to making a bankruptcy order, which is what the judge went on to do.

The respective positions of the parties on the appeal were on the one hand Mr Hood’s reliance on not having in fact disposed of property that was part of his estate, whereas the respondent relied on the loan from Mr Hill being property and  breach of the pari passu principle.

Counsel for Mr Hood focused on whether the loan from Mr Hill to Mr Hood could be considered to be property of Mr Hood disposed of by Mr Hill's payment to HMRC. The net result of the payment was that the debt owed to HMRC had been replaced by a debt owed to Mr Hill, so the effect of the transaction was neutral so far as creditors were concerned and there was no breach of the pari passu principle. On that basis, the payment by Mr Hill to HMRC was not caught by s. 284 and would not be void if a bankruptcy order were made. On the same basis, and applying Smith v Simpson, the payment required the petition to be dismissed under s. 271(1) of the Act and the court was precluded from making a change of carriage order of the petition by reason of rule 10.29(3).

Counsel for the change of carriage creditor argued that that characterisation of the loan ran contrary to the policy behind rule 10.29,  s. 271 and s. 284 as it operated contrary to the pari passu principle which is what that rule and the sections of the Act were designed to protect. She rejected the argument that the arrangement was a kind of refinancing: Mr Hood remained  insolvent at all material times. She also submitted that it should not matter whether the money was paid via the debtor or went directly from the third party, but in any even the loan had to be void under s. 284, whether or not it was paid via the debtor. Counsel for Mr Hood disagreed: he submitted that if a gift of money was made to the debtor and the debtor used that money to pay the petitioner that had to be within the scope of operation of s. 284 as the money became the debtor’s property by reason of the gift. The same applied to the loan: if it was paid to the debtor and then used by him to pay the petitioner it was void, but if it is not paid to him first, it never became his property, and the direct payment by a third party could not fall foul of s. 284.

The central question, Michael Green J decided, was whether an outstanding loan obligation could be described as “property” for the purpose of s. 284. He held that an obligation to repay a loan was not "property" within the meaning of s. 436 Insolvency Act:

“Even though s. 436 refers to an ‘obligation’, as Arnold J (as he then was) pointed out in Shlosberg v Avonwick Holdings Ltd [2017] Ch 210 at […] that can only mean an ‘obligation’ owed to, not by, the debtor. This was also made clear by Lightman J in Coutts v Stock [2000] 1 WLR 906 in which he set out certain ‘principles’ as to the operation of s. 127 of the Act including in relation to an increase in a company’s bank overdraft: ‘the loan by the bank to the company is not a disposition of the company’s money (it is a disposition of the bank’s money to the company) and is therefore outside section 127.’”

He concluded:

“In my judgment therefore, the monies paid by Mr Hill direct to HMRC, together with the Appellant's obligation to repay Mr Hill the same amount, never became the "property" of the Appellant such as to engage s.284 of the Act. It follows that I reject [counsel for the creditor’s] contention that the notion of third party payments within s.271(1)(a) and rule 10.29(3) following Smith v Simpson is confined to gifts from third parties and does not extend to loans from them.”

In his view, the deputy ICC judge had erred in law in relying on Re Salaman, a decision under the Bankruptcy Act 1914, under which there were no change of carriage rules, and in which the legal status of moneys lent did not feature. The deputy judge should have held that rule 10.29(3) prevented the making of a change of carriage order and that the court could not make a bankruptcy order under s.271(1)(a) because the petition debt had been paid.

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